Weak Start To The Year For Ibex 35 Companies

F. Barciela / F. Gil Ljubetic | If there had been a recovery in the Ibex 35 companies previously, it’s clear that this has stopped or slowed in the January-March period. Amongst those which have already presented first quarter results, very few have given investors much of a reason to be happy. Of the 21 companies we’ve analysed, 11 have seen their profits rise – in general only slightly – and the other 10 have seen their profits fall or have posted losses. In fact, if we take the banks out of this calculation – which have come off worst in this classification – there are eight companies which have posted an increase in profits and six a decline.

It’s obvious that there are still a lot of doubts regarding the banks. Of the seven lenders which have already reported their quarterly earnings, four have seen a drop and only three an increase. BBVA posted a 53.8% decline, Caixabank a 27.2% drop, Santander a 5% reduction and Bankia a 3.3% decline. Meanwhile, Sabadell saw its profits rise by 44.3%, Bankinter by 10.1% and Popular by 2.6%.

Apart from the fact that business in general continues to stagnate due to weak lending activity and low interest rates – commissions and net interest margins are anemic or plummeting – the banks have also not acheived good results from their portfolios. Santander’s net interest income fell by 5.2% in the first quarter, Bankia by 12.4%, Popular by 1.9% and Caixabank by 10.4%. But Sabadell and Bankinter’s rose substantially, by 8.2% and 3.9% respectively.

Of course it hasn’t helped any that the banks have had to include the elimination of the “floor clause” in their accounts, which in some cases has meant a huge dent in revenues. The big international banks like BBVA and Santander have also been affected by the depreciation of the Latin American currencies.

Another factor which has weighed on the results of some of the banks has been asset divestment operations which incurred losses for the banks. This has been partly the case for BBVA, where a heavy decline in profits was largely due to the sale of the China’s CNCB: but even without this sale, earnings would have fallen 11.6%. A similar thing happened to Bankia. The sale of City National Bank of Florida was behind the 3.3% drop in profits. Without that transaction, they would have risen 2.1%.

In the case of CaixaBank, the drop in profits was due to the lack of extraordinary items compared with the same quarter of 2015, which benefited from the one-off positive impact of the integration of Barclays. The complete opposite happened with Sabadell, which saw its profits rise 44% thanks to the integration of UK lender TSB.

It’s likely that this situation will remain as the banks will continue to sell off assets, many of which will produce losses. Furthermore, they will still be going ahead with the sale of property assets to reduce their NPLs ratio, which remains very high in some cases. Popular’s NPL ratio stands at 12.68%, Caixabank at 7.6%, Sabadell at 7.5%, BBVA at 5.3% and Bankinter at 3.95%.

The outlook seems equally complicated for the insurers, affected by new capital requirements and the increase in compensations payments in the car insurance segment: this, the price wars, the rise in accidents in this segment and negative interest rates are all putting pressure on these companies’ business and profitability. That said, the 4.8% drop in Mapfre’s profits is basically due to the negative comparison with the same quarter a year ago, when the company posted extraordinary gains with Catalunya Caixa. Otherwise, it would have posted a 6% rise in profits in the first quarter of 2016.

The majority of the big non-financial companies which have announced a decline in earnings are continuing to see a certain stagnation in activity, with the logical reduction in margins. Their accounts have also been affected by the depreciation of the Latin American currencies and divestments to clean up their balance sheets. In many cases, these operations have generated losses.

Telefonica saw a particularly sharp drop in profits, down 57% at 776 million euros. But this was due to the fact that the company benefited from “a positive tax effect” in the first quarter of 2015. Revenues fell 6.6%, which the company basically attributed to the depreciation of the Latin American currencies.

As was expected, Repsol has also seen its profits drop due to the price of crude which affects its Exploration and Production (E&P) business. But despite announcing a 43% fall in profitability, the company’s share price rose because the market was expecting much worse results. What happened was that during the first quarter, the E&P division managed to move out of red numbers, due to a slight uptick in prices.

The construction companies are still having a difficult time. If any of them did report positive figures it was thanks to their other activities, not to building or other public works which have not picked up. FCC lost 16.7 million euros in the quarter, which the company attributed to the sale of a stake in Globalvia (with losses), to exchange rates and to its construction business, which recorded losses of 9.1 million euros, above all in Spain. Revenues from its domestic construction operations fell 9.2%.

Sacyr’s construction business fell 8%. And it only managed to post a 3.5% rise in revenues due to growth in its industrial and services’ divisions. That said, it saw a 68% jump in profits due to the sale of various assets, almost of all which were in Portugal.

Ferrovial was the only one of the three large construction companies which presented results worth shouting about. Profits rose 32% to 157 million euros, in large part due to the sale of assets at a good price, like the Chicago Skyway. But the most important thing is that revenues from its motorway and airport concessions have begun to rocket, offsetting the stagnation in construction.

The utilities also seem to be stranded in no-man’s land. Consumption is not shining. For example, Enagas saw a scant 0.5% rise in profits, but the reality is that revenues dropped 1.2% due to the fall in natural gas demand in Spain. Iberdrola’s international business was the main driver behind its 6.8% rise in revenues. EBITDA in Spain fell 31.5% on weak demand.

IAG, Gamesa and Aena have been the big success stories. The continued increase in traffic at Spain’s airports (up 14% in the first quarter) has helped Aena post a 10.2% rise in revenues. Profits soared 140% thanks to internal savings measures, the rise in commercial revenues and lower financial costs. It is one of investors’ preferred Ibex 35 companies.

IAG has also benefited from the increase in air traffic, seeing a 7.9% rise in revenues. For its part, Gamesa posted a 29.7% increase in sales (almost all outside Spain), while its profit was up 15%.

About the Author

Fernando Barciela has been a regular collaborator for Spain's leading daily El Pais' business section since 1994. He is also a regular collaborator on foreign policy. For Grupo Consejeros he interviews the top executives of Spain's listed companies. He was a correspondent with Diario de Noticias, Portugal's leading daily newspaper, in 1987-2004. He has a degree in Business Science and Journalism from the Complutense University.